6% inflation target requires govt help as well: Shubhada Rao

Q&A with Chief Economist, YES Bank

RBI in its monetary policy review today maintained a status quo on rates. In an interview with Jinsy Mathew, Shubhada Rao, Chief Economist, YES Bank says RBI's 6% inflation target will be a challenge. Edited excerpts:

 

How do you read today's policy?

 

The policy is very much in line with expectations, with the governor saying that anchoring inflation is the top priority.

 

The work done so far has made the 8% inflation target seem easy but the 6% target is where the expectations are anchored. The monetary policy can achieve 8% inflation target but for the 6% target the central bank will need government's support. Government policy translating to a pickup in investment and addressing supply side issues will bring confidence.

Are there still upside risks to inflation?
 

The governor has clearly said that we need to be aware of geopolitical risks. Even though none has materialised as yet, he is guarding the economy from those risks. As a result, he is going to be on the 6% inflation target. For instance, the way commodity cycle has panned out is a positive for the Indian economy. So as compared to last time, the risks are on the lower side. 

 

While geopolitical risks and normalising of the US monetary policy will pave the way for future action, we believe today India is in a better position and far more resilient to face these changes.  

 

Even though WPI has been encouraging, the CPI inflation continues to be worrisome? By when do you do see the CPI easing?

 

There are two aspects to CPI. One is the base effect play, which indicates that November would be the lowest point, with the CPI slipping tad below 7%. Now in the subsequent three months we will see CPI trending lower with September at 7.1-7.2%, October could be sub-7% and November could be around 6%. These are numbers because of the base effect, so there will market expectation and clamor for interest rate cut. But a small reversal is likely going forward with March seeing a little over 7.5%. So definitely 8% is achievable.  

 

What according to you will prompt the RBI to go ahead with a rate cut?

 

Geopolitical ricks abating, US monetary policy normalisation not overly affecting the markets, recovery in investment cycle and food inflation trending lower will give RBI the confidence to go ahead with a rate cut. Hence, a combination of structural measures are needed for a rate cut.

 

RBI has projected FY16 GDP at 6.3%. Do you read that as a sign for the government to get its act together?

 

We believe that FY16 GDP is going to be around 6.5% because we see growth picking up as decision making and ease of doing business improves. It’s only a matter of time and one must remember that all the positives won’t result into clear visibility within a quarter. A lag of atleast two to three quarters will be there. 

 

Do you see rupee depreciating in the near term due to global monetary policy? 

 

On the liquidity front, we maintain that even if US is completely at the end of its taper we still have ECB and Japanese central bank continuing liquidity enhancing programs. So, liquidity won't dry up. But the capital flows will be selective. Even among the emerging markets, I would say India stands among the top three investment destinations due to strong government and  improving macro conditions.

 

With the improvement in Indian economy, India will attract capital flows which will limit the downside to rupee even as the dollar index strengthens. So that’s why I don’t see the Indian currency visiting its August 2013 lows again.